The Determination of the Level of Activity

Abstract

We will begin by repeating in simplified form the identity which exists between income and expenditure. Take a simple example. A teacher buys a table from a carpenter. With the money he receives, the carpenter pays the timber merchant for the wood, who in turn pays the man who cut the wood. But where did the teacher obtain the original money to buy the table? Simply from the carpenter, the timber merchant and the tree-feller, who each use part of their receipts to pay fees to the teacher for instructing their children. So with the other goods the teacher buys. Thus there is a circular flow of income — one person’s spending becomes another person’s income. Spending is therefore necessary for earnings.